Wednesday, 14 August 2013

The Meaning of Competition

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There are signs of increasing awareness among economists that what they have been discussing in recent years under the name of “competition” is not the same thing as what is thus called in ordinary language.
But, although there have been some valiant attempts to bring discussion back to earth and to direct attention to the problems of real life, notably by J.M. Clark and F. Machlup, the general view seems still to regard the conception of competition currently employed by economists as the significant one and to treat that of the businessman as an abuse.

It appears to be generally held that the so-called theory of “perfect competition” provides the appropriate model for judging the effectiveness of competition in real life and that, to the extent that real competition differs from that model, it is undesirable and even harmful. For this attitude there seems to me to exist very little justification. I shall attempt to show that what the theory of perfect competition discusses has little claim to be called “competition” at all, and that its conclusions are of little use as guides to policy.

The reason for this seems to me to be that this theory throughout assumes that state of affairs already to exist which, according to the truer view of the older theory, the process of competition tends to bring about (or to approximate) and that, if the state of affairs assumed by the theory of perfect competition ever existed, it would not only deprive of their scope all the activities which the verb “to compete” describes but would make them virtually impossible.

If all this affected only the use of the word “competition,” it would not matter a great deal. But it seems almost as if economists by this peculiar use of language were deceiving themselves into the belief that, in discussing “competition,” they are saying something about the nature and significance of the process by which the state of affairs is brought about which they merely assume to exist. In fact, this moving force of economic life is left almost altogether undiscussed.

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